Greetings, We’ve been a little light on the posts lately. But you can still sign up for our gigantic “new laws” Webinar here. We have several dates set as of now, including December 1, 10, and even January 7. Watch the incomparable Jennifer Shaw play all the hits:
- Amendments to the California Family Rights Act, including its application to employers with five or more employees and expansion of “family members” covered by the law
- COVID-19 Cal/OSHA and local health department reporting requirements
- Workers’ compensation presumptions for COVID-19 positive employees
- COVID-19 Supplemental Sick Leave for large employers
- The modified ABC Test for independent contractors
- Legal standards for reasonable accommodations, wage-hour compliance, and workplace safety
And more! Stay informed. Stay safe. Stay thirsty my…oh, wrong blog.
Anyway, let’s catch up on some of the major non-COVID employment law developments since our last blogs. We’ll have a separate COVID-related post soon.
Employees Under 18 Can Avoid Arbitration Agreements, Even After They Turn 18!
Some employers hire workers when they’re not yet 18 years old, I.e., minors. A minor can “disaffirm” a contract under California law before they reach majority age, or within a reasonable time thereafter. Arbitration agreements, you know, are types of contracts.
So Sarah Coughenour was a Del Taco employee, hired when she was 16. She signed an arbitration agreement at that time. She worked until after she turned 18, when she quit. She sued Del Taco for harassment, discrimination, retaliation, and meal and rest period violations. When Del Taco reminded her of her arbitration agreement, she said she disaffirmed it by filing a lawsuit within a “reasonable time” after reaching her 18th birthday; I.e., almost eight months after turning 18, even though she had already left Del Taco when she did so.
Del Taco argued that by her continuing to work for four months after reaching 18, Coughenour “ratified” the arbitration agreement and could not disaffirm it. The Court of Appeal disagreed:
Nothing in Coughenour’s declaration establishes that she was aware of her right to disaffirm the Agreement once she was 18 years old. To hold that Coughenour impliedly ratified the Agreement by continuing to work at Del Taco for four months after she turned the age of 18 would go against the policy “of the law to protect a minor against himself and his indiscretions and immaturity.”
The Court also found that the trial court did not “abuse its discretion” when it found that Coughenour disaffirmed the agreement within a “reasonable time.” That sets a new standard that eight months after reaching the age of majority, and four months after departing employment, is “reasonable.” However, “reasonable” is a fact-based analysis and may vary depending on the case.
So, Coughenour was able to escape her arbitration agreement and pursue court litigation. This case is Coughenour v. Del Taco LLC and the opinion is here.
What’s an employer to do?
- Don’t hire people under 18 unless they intend to put procedures in place once they turn 18
- Ensure that when minor employees turn 18, they must affirm all contractual arrangements, such as arbitration agreements, confidentiality agreements, waivers of liability, etc.
- Consult with counsel whether to advise minor employees that they have the right to disaffirm contracts until the age of majority, but if they do, they may not continue in employment.
Arbitrators Cannot Enforce Non-Compete Clauses Either
Arbitrations are supposed to be final, and mostly they are.
Mostly. But the courts won’t allow an arbitration to stand under limited circumstances, such as when the arbitrator’s ruling violates a clear public policy. One thing we do know, is that a non-compete agreement violates California public policy.
Brown and TGS had an employment relationship, which included bonus agreements, confidentiality agreements, and agreements to arbitrate. One of the confidentiality agreements, 12 pages long, defined confidentiality broadly enough to preclude Brown from working in TGS’s industry for a long time. Forever, even.
Brown asserted a variety of claims against TGS in litigation; TGS counter-claimed. Among other things, Brown sought to invalidate TGS’s non-compete provisions. In arbitration, TGS stated it would not seek to enforce a number of provisions that it knew wouldn’t be enforceable under California law. However, TGS sought to recoup certain bonuses it paid Brown because of post-termination conduct by Brown that, TGS claimed, violated its confidentiality agreement. Brown also sued for a variety of wrongful termination type claims.
The Arbitrator held that Brown was not entitled to relief for a variety of reasons, and that TGS was entitled to recoup its bonuses as well as attorney’s fees and costs. Brown sought to vacate the arbitration award. The Court of Appeal held that the Arbitrator’s decision could not stand. As such, the Arbitration award was vacated.
The Court of Appeal’s grounds are interesting for reasons other than arbitration, though.
- The Court of Appeal decided that TGS’s “confidentiality agreement” – was so broad that it was as unlawful as a non-compete agreement:
In effect, as Brown points out, “TGS is claiming for itself, without limitation, all information that is ‘usable in’ or that ‘relates to’ the securities industry.” So defined, the “Business” means not just statistical arbitrage––the actual business of TGS––but, instead, refers to all aspects of working in the securities industry at large. Brown asserts these confidentiality provisions effectively bar Brown from ever using TGS’s “Confidential Information” for the benefit of any party other than TGS; he contends the provisions are so expansive as to “prevent Brown from trading in securities at all––even if just for his own benefit––for the remainder of his life.”
* * * *
Based on our analysis of these provisions, set forth in detail above, we conclude the confidentiality provisions in the Employment Agreement on their face patently violate section 16600.6 Collectively, these overly restrictive provisions operate as a de facto noncompete provision; they plainly bar Brown in perpetuity from doing any work in the securities field, much less in his chosen profession of statistical arbitrage. Consequently, we conclude the confidentiality provisions are void ab initio and unenforceable
2. The Court Reaffirmed that Bonus Forfeitures Cannot Be Based on Violations of Non-Competes
Brown also challenges the arbitrator’s ruling Brown forfeited his deferred bonuses by violating the confidentiality provisions of the Employment Agreement. Brown makes several arguments on this point, but we find one compelling: Brown persuasively asserts that because the arbitrator explicitly based his finding of forfeiture on Brown’s breach of confidentiality provisions which violate section 16600,7 the forfeiture ruling enforces those illegal provisions and is itself inconsistent with the protection of Brown’s statutory rights. Accordingly, the forfeiture ruling in the arbitration award is also subject to reversal under Moncharsch, supra, 3 Cal.4th at page 32.
So, this case will be arbitrated again, or settled. But TGS won’t be recouping its bonus based on the breach of the non-compete. There may be other grounds, though. The opinion in Brown v. TGS Management Co. is here.
Commissions Are Not Salaries
A gentle reminder from the Court of Appeal that when classifying employees as “exempt” under the “white collar” exemptions (executive, administrative, professional), California law requires payment of a “salary” of twice the state minimum wage X 40 hours X 52 weeks. A salary is a fixed sum. Commissions aren’t.
Semprini v. Wedbush Securities (opinion here) involves securities brokers paid on commissions, including recoverable draws. Wedbush classified them as “exempt” under the administrative exemption. But….
Wedbush pays its financial advisors on a commission-only basis. It uses a computer program to track the trades they make in a given month and then calculates the compensation owed based on what commission tier the employee met that month. The higher the employee’s total monthly gross product sales, the higher the percentage used to calculate the employee’s monthly commission payment.
And Labor Code section 515 says:
The Industrial Welfare Commission may establish exemptions from the requirement that an overtime rate of compensation be paid pursuant to Sections 510 and 511 for executive, administrative, and professional employees, if the employee ***earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment
Well, what does “salary” mean, anyway? It seems one only has to read the federal regulations under the Fair Labor Standards Act to find out:
the federal regulations state that to meet the salary basis test, the employee must regularly receive “a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.” (29 C.F.R. § 541.602(a) (2019) italics added.) Wedbush’s compensation model does not fit within that definition because the financial advisors’ commissions fluctuated each month based on their performance and the quantity of their sales. The higher the employee’s total monthly gross product sales, the higher their commissions; and conversely, the lower their sales, the lower their commissions.5 Such a compensation system does not meet the salary basis test.
Put another way, these Wedbush employees don’t even qualify as exempt under *federal* law. And California law does not contain some of the employer-friendly accommodations that federal wage and hour law provide regarding salary basis (such as allowing up to 10% variable compensation to be included in the salary calculation for certain employees).
So, when classifying people as exempt, the base salary must be fixed, and not based on quality or quantity of work, such as sales. Commissions or other variable pay are fine, but must be paid on top of the base salary. Although commissions on top of salary would be a lawful method of compensation, it could call into question the basis for the exemption under the duties test. But that’s another post for another day….
Two Federal Department of Labor Opinion Letters
Although the federal Department of Labor interprets the Fair Labor Standards Act, its reasoning can be helpful when interpreting some aspects of California wage and hour law. For example, overtime is calculated in a similar fashion – mostly. And the white collar exemptions are similar in several respects. But it’s important to know the differences between federal and state law as well. With that said, here are a couple of new DOL opinion letters for your information:
FLSA 2020-15 here is an interesting discussion of when training time is compensable and not compensable. The letter goes through six different scenarios. The author lays out the standards for when training time is and is not compensable and then analyzes the six different fact scenarios under the standards.
FLSA 2020-16 (here) concerns payment of travel time under three different scenarios. This opinion letter is more problematic for California employers, because it involves the Portal-to-Portal Act, a federal law that does not apply in California. However, it also applies the “continuous workday rule” and other principles that do apply in California. This letter is helpful because if work time is compensable under federal law, one may be certain that it is compensable in California as well. So, at minimum, worth a read and then a discussion with competent wage and hour counsel.
More updates to come!